UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB

(Mark One)

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
                                     FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

|_|   TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
                        FOR THE TRANSITION PERIOD FROM __________ TO __________
                        COMMISSION FILE NUMBER ________________________________

                            LAPIS TECHNOLOGIES, INC.
                            ------------------------
                 (Name of small business issuer in its charter)

                  DELAWARE                            27-0016420
                  --------                            ----------
     (State or other jurisdiction of     (I.R.S. Employer Identification No.)
      incorporation or organization)

                19 W. 34th Street, Suite 1008, New York, NY 10001
                -------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone Number: (212) 937-3580
                                               --------------

Securities registered under Section 12(b) of the Exchange Act: None.

Securities registered under Section 12(g) of the Exchange Act: None.

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|

      Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|

      Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|

      Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

      State issuer's revenues for its most recent fiscal year. $7,269,000

      The aggregate market value of the voting and non-voting common equity held
by non-affiliates, computed by reference to the average bid and asked price of
such common equity as of March 30, 2005, was $769,650.

      As of March 30, 2005, the issuer had 6,483,000 outstanding shares of
Common Stock.

                    DOCUMENTS INCORPORATED BY REFERENCE: NONE

      Transitional Small Business Disclosure Format (check one): Yes |_| No |X|


<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                      Page
                                                   PART I

<S>  <C>                                                                                                <C>
Item 1.    Description of Business....................................................................  1
Item 2.    Description of Property....................................................................  9
Item 3.    Legal Proceedings.......................................................................... 10
Item 4.    Submission of Matters to a Vote of Security Holders........................................ 10

                                                  PART II

Item 5.    Market for Common Equity and Related Stockholder Matters................................... 11
Item 6.    Management's Discussion and Analysis or Plan of Operation.................................. 11
Item 7.    Financial Statements....................................................................... 15
Item 8.    Changes In and Disagreements with Accountants on Accounting and Financial Disclosure....... 15
Item 8A.   Controls and Procedures.................................................................... 15
Item 8B.   Other Information.......................................................................... 16

                                                 PART III

Item 9.    Directors, Executive Officers, Promoters and Control Persons;
               Compliance With Section 16(a) of the Exchange Act...................................... 16
Item 10.   Executive Compensation..................................................................... 17
Item 11.   Security Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters....................................................... 18
Item 12.   Certain Relationship and Related Transactions.............................................. 20
Item 13.   Exhibits................................................................................... 20
Item 14.   Principal Accountant Fees and Services..................................................... 21


SIGNATURES............................................................................................ 22


</TABLE>
<PAGE>

                                     PART I

ITEM 1.       DESCRIPTION OF BUSINESS.

      Lapis Technologies Inc. was formed in Delaware on January 31, 2002 under
the name Enertec Electronics, Inc. and has filed two Certificates of Amendment
changing our name to Opal Technologies, Inc. and then to Lapis Technologies,
Inc. We conduct operations in Israel through our wholly owned subsidiary,
Enertec Electronics Limited ("Enertec Electronics"), an Israeli corporation
formed on December 31, 1991, and Enertec Systems 2001 LTD ("Enertec Systems"),
an Israeli corporation formed on August 28, 2001, of which we own a 73% equity
interest. We are manufacturers and distributors of electronic components and
products relating to power supplies, converters and related power conversion
products, automatic test equipment (ATE), simulators and various military and
airborne systems. Where the context requires, references to "we" "us" or "our"
throughout this document include reference to Enertec Electronics and Enertec
Systems.

      Our revenues are derived from two main sources, the commercial and the
military markets. In the military market we, design, develop and manufacture
test systems, airborne, shipborne, land electronic equipment and other various
military systems, for military manufacturers in accordance with their
specifications. Most of this military business is carried out by the majority
owned subsidiary Enertec Systems. In the commercial market we market and
distribute test systems, power supplies and other electronic components
manufactured in-house, and by other manufacturers who engage us to distribute
their products. This activity is carried out primarily by Enertec Electronics, a
wholly owned subsidiary. We have entered into representative and distribution
agreements with seven such manufacturers, four of which have been reduced to
written contracts.

      The accompanying consolidated financial statements present the results of
operations of Lapis Technologies, Inc. and our wholly owned subsidiary Enertec
Electronics and its ownership interest in Enertec Systems, for the years ended
December 31, 2005 and 2004. All material intercompany accounts and transactions
have been eliminated in consolidation.

OUR SUBSIDIARIES

      In April 2002, we acquired all of the outstanding capital stock of Enertec
Electronics, making it our wholly owned subsidiary. In this transaction, we
acquired 99 ordinary shares of Enertec Electronics from Harry Mund, our
President and Chief Executive Officer, in exchange for 4,750,000 shares of our
common stock. The common stock issued to Mr. Mund represented 86.6% of our
outstanding common stock after the transaction.

      Enertec Management Limited (f/k/a Elcomtech Ltd.), a private Israeli
company, is a wholly owned subsidiary of Enertec Electronics.

      Enertec Systems, a private Israeli company, is owned by Enertec Management
Limited ("Enertec Management") (73%), and Harry Mund (27%), our President and
Chief Executive Officer of Enertec Electronics Limited. The President and Chief
Executive Officer of Enertec Systems is Harry Mund, and the Chief Operating
Officer is Zvika Avni. Enertec Systems commenced operations on January 1, 2002.

ENERTEC ELECTRONICS

      Enertec Electronics is responsible for:

      o     The marketing and distribution of power supplies and other related
            power products manufactured by us and third-party firms that engage
            us to distribute their products; and

      o     The marketing and distribution of power supply testing equipment to
            our military and commercial customers.


                                       1
<PAGE>

      Our customers have products that require power supplies. We are contacted
by them with their specifications, and based on that data, we provide a
standard, or if necessary, a semi-custom or custom, power supply solution. Our
technical sales staff in Israel has a comprehensive understanding of our
customers' product base, which allows us to provide the most efficient power
supply solution to our customers. Our professional marketing and sales teams
include engineers who provide support to customers from the early stages of
product definition and first sampling, through the production stages and up to
after-sales support. Examples of products that require power supplies are
computers, modems, printers, faxes, telephones, transmitter/receivers for
commercial and military communications, radar, airborne infra-red cameras,
surveillance equipment, telecom network routers, video-conference routers,
cellular telephone transmitters/receivers, television on-routers,
internet-routers, medical MRI scanners, x-ray equipment, robots, drivers for
electric motors, and industrial control systems.

      We have also entered into representative contracts or distribution
contracts with various international power supply manufacturers. These
manufacturers granted us exclusive rights to sell their products in Israel. We
solicit sales within Israel and, upon receipt of purchase orders, we contact the
supply manufacturers to fulfill such orders. We thereafter apply a mark-up to
the products. We have exclusive rights in that the supply manufacturers do not
promote their products directly within Israel. Further, if a customer contacts
the supply manufacturers directly, such manufacturer will redirect the customer
to us, or advise us to contact the customer regarding the order.

      We are also a major local Israeli distributor of power testing equipment.
This includes DC and AC electronic loads, that is, equipment used for the
testing of power supplies which utilize alternate current (AC) and direct
current (DC) technology. We also provide various measurement devices that
measure factors such as electrical values, voltage, current, power, resistance,
and simulators - that is, pieces of equipment used during the testing process to
simulate different input/output conditions while monitoring the responses of the
unit to determine whether the equipment is functioning correctly. Additionally,
we provide complete ATE Systems (automatic test systems), which are complete
systems typically built to automatically test electronic systems in their
entirety. Examples of such systems are power supplies, computers, modems,
telecom systems, electronic motors, communication equipment, and various
military systems used on aircrafts, ships or tanks.

      Although Enertec Electronics is no longer generating revenues within the
military industry for customized systems, it does have a small amount of
residual orders of ATE's to be delivered during the course of 2006, however
Enertec Eletronics is focusing its efforts almost exclusively on developing its
business within the power supplies and power supply testing equipment arena.

ENERTEC SYSTEMS

      Enertec Systems is responsible for designing, developing and manufacturing
test systems for electronics manufacturers in the military industry based on
their specifications. Our systems are highly sophisticated and we have achieved
recognition as a major local manufacturer of ATE Systems. We also design and
manufacture various airborne military systems - for example, electronic systems
used in aircrafts such as power supplies, laser drivers , mission computers and
control systems for motor and pumps, radio transceivers, altitude measuring
devices, and sub-assemblies, which are parts of a system developed with a
customer's specifications.

      Through our subsidiaries we customize power supplies, create military
systems and ATE's. Enertec Electronics focuses on manufacturing and distributing
standard and customized power supplies in the non-military arena, as well as the
distribution of standard military related power supplies. Enertec Systems meets
the scrupulous customer standards which demand compliance with stringent
security clearance standards. Enertec Systems exclusively manufactures
customized military related products. Our quality control systems are compliant
with ISO9001:2000.

      The International Organization of Standardization ("ISO") designated
ISO9001:2000 to apply to organizations that design, develop, produce, install,
and service products. ISO expects organizations to apply this model, and to meet
certain requirements, by developing a quality control system. ISO9001:2000 is
the international standard for quality assurance and quality design. This is the
most common worldwide standard and is implemented across all kinds of
organizations, including manufacturers, schools and shops. Most customers in our
industry insist on doing business with companies that are least ISO9002:2000
approved, a standard that is less demanding than IS9001:2000. The ISO9002:2000
standard is related mainly to the quality assurance of the manufacturing
process, while the higher ISO9001:2000 standard includes both the quality
assurance of the manufacturing process component as well as the quality of the
design. The ISO9001:2000 standard is important to customers who are placing
orders for custom made products.


                                       2
<PAGE>

      The ISO9001:2000 quality assurance model is made up of a combination of
quality system requirements.

      The key requirements are that an organization should:

      o     Determine the needs and expectations of customers and other
            interested parties;
      o     Establish policies, objectives and a work environment necessary to
            motivate the organization to satisfy these needs;
      o     Design, resource and manage a system of interconnected processes
            necessary to implement the policy and attain the objectives;
      o     Measure and analyze the adequacy, efficiency and effectiveness of
            each process in fulfilling its purpose and objectives; and
      o     Pursue the continual improvement of the system from an objective
            evaluation of its performance.

      A typical process for designing, planning and implementing a quality
system typically involves:

      o     Planning the quality initiative and obtaining executive sponsorship;
      o     Establishing the quality policy for the organization;
      o     Designing and planning the Quality Management System (QMS), usually
            based on international standards;
      o     Establishing the quality organization, developing the quality manual
            and structure of quality records;
      o     Determining the scope of implementation;
      o     Assuring quality plans;
      o     Reviewing deliverables and determining any actions;
      o     Auditing quality records;
      o     Defining areas for process improvement; and
      o     Managing the improvement program.

NEW PRODUCTS

ENERTEC SYSTEMS

      During 2004, Enertec Systems, began focusing exclusively on the military
arena, and entered into numerous new fields of military technology in addition
to our "classic" ATE field of expertise. In 2005, Enertec Systems continued this
focus almost exclusively.

      During 2004 we successfully marketed a new line of ruggedized Command and
Control mobile stations of modular architecture, allowing
adaptation/customization to various applications for which we received and
delivered several orders. In 2005, we delivered several units for qualification
and integration. Following this successful integration we expect many more
follow up orders over the next eighteen months.

      Over the last twelve months, we started selling ruggedized mission
computers for combat vehicles. This new line has been well received and we have
already delivered three prototypes to I.A.I. (Israeli Aircraft Industry) who
intends to replace their computers which were previously manufactured in-house
and have been active in the field for many years and are looking for a new
outsourced supplier of these mission computers. These first units that we
delivered, have successfully passed all qualification and validation tests. As a
result of the success of the prototype, in 2006 we anticipate many more orders
to fulfill IAI's need for their replacements.

      We introduced a new line of military grade Power Distribution Units for
use in airborne, shipborne and ground applications. We have already received
the, first batch of orders generating about $800,000 in revenues which were
delivered during 2005. Further units are scheduled for deliveries over the next
four years.


                                       3
<PAGE>

      We introduced a new test system for the helicopter's flight computer which
generated an order for the first unit in 2004. This system was designed and
built during 2005 and we began the testing with the various units it will be
integrated with. We expect to deliver the first order during 2006. We are
expecting its successful launch to generate several follow up orders within the
next twelve months.

      Capitalizing on our technical expertise in the missiles testing field, we
have introduced a comprehensive system to test and simulate all stages of a
ground-to-air anti-missile missile as well as a new test system for air-to-air
missiles.

      We also designed an innovative, small airborne multiple-output power
supply specially designed for attack payloads. It uses a proprietary technology
that was developed in-house to power a planar switching transformer which
enables further miniaturization and a higher output power to size ratio. This
new line has been well received by our customers, and the first samples have
already passed the stringent military screening tests. As of the end of 2005 we
received our first orders in the amount of $240,000. Part of them have been
delivered during the 4th quarter of 2005, the balance is scheduled for delivery
during the 1st and 2'nd quarters of 2006.

      During 2005 we introduced several new designs, which are described below.

            1. A Laser system and driver for Airborne Targeting Pods, utilizing
      laser designation of targets. This is a new entry into the field of
      high-tech, high accuracy and high power military lasers. Our innovative
      and unique design is based on a state of the art high-power laser diode
      which provides high accuracy and long range detection and tracking of
      targets. This project is a turn-key product from the initial electronic
      and mechanical design up to the production and delivery of the complete
      system. We have already received an order for the first systems generating
      revenues of $250,000 with a delivery date staggered over 2006.

            2. A Ground Control System for airborne attack platforms. The system
      receives data from aircrafts and transmits it in real time. The design was
      based on an upgraded version of a previous design already proven in the
      field. We received several orders in the amount of $240,000, with
      anticipated follow up orders for 2006.

            3. A Simulation and Test System for a highly classified defense
      project. This technologically complex design is being outsourced for the
      first time, and so was very tentative in progress, however we have already
      delivered the first batch in December of 2005 resulting in revenues of
      $1,250,000 with a record lead-time of 3 months. We expect to receive
      repeat orders of about 5 systems per year.

            4. A Generic Test System for new anti-tank missiles. This
      incorporated state of the art hardware and software designs, tests and
      validates 30 different sub-systems. The first systems were ordered in the
      amount of $1.4 Million dollars. This test system for anti-tank missiles,
      could generate orders for a couple of units a year for approximately the
      next ten years.

ENERTEC ELECTRONICS

      We successfully completed the UL safety approvals for a new custom-made
power supply. It is implemented in a series of modems for fast network access of
data and voice over the IP network. In 2005, 1500 units were ordered.

      We delivered the first samples of DC/DC converters for military CDU
(Command Display Units) in the fourth quarter of 2004. These samples were
followed with an order for 1500 which were delivered over the course of 2005.

      We entered into a new arena of customized power supplies for fast data
networking systems. We customized compact PCI power supplies and during 2004
received orders for 200 units. This successful launch resulted in more than 200
units in follow-up orders in 2005.


                                       4
<PAGE>

            During 2005 we introduced several new products with long expected
      lifecycles, which are described below:

            1. We designed a compact, and economical optimized cost/performance
      redundant power supply for data communication application. The first
      samples were delivered and have already resulted in a follow up order for
      several thousands units to be delivered over 2006 generating a backlog of
      about $155,000.

            2. We launched a new compact PCI power supply for a Video-On-Demand
      application, the first samples were delivered in the 4th Quarter of 2005.

            3. We released and delivered 200 industrial-grade power supplies for
      air-conditioning systems. The potential follow up for the next eighteen
      months is in the range of 3000-5000 additional units.

            4. 50 Multiple-output power supplies for mobile wireless
      communication were installed.

            5. We designed a customized external power supply for military
      note-book computers which will be installed by our customers to the US
      military within the army, navy, air-force etc. The first 25 power supplies
      have already been delivered and successfully passed all the stringent
      military qualification tests. We expect to generate in the order of
      several thousands of units per year for several years in the future.

            6. The first samples of a new compact PCI power supply for Video
      Conferencing were delivered in the 4th Quarter of 2005.

MARKETING STRATEGIES

      We market our products to a diverse group of manufacturers. Our products
serve the various needs of local Israeli manufacturers of electronic systems in
the following fields:

      o     Telecommunications;
      o     Medical;
      o     Military; and
      o     Industrial.

      We currently sell only to Israeli companies that, in turn, incorporate our
components into their products for resale to the global markets. However in the
future we anticipate creating some kind of platform to market Enertec Systems'
products to U.S. companies as well as creating a manufacturing base within the
United States so as to benefit from U.S. government dollars directed to Israel's
military aid with the condition of being spent on U.S manufactured products.
Currently we advertise in all the local Israeli technical magazines and
participate in electronic seminars, exhibitions and shows four to six times a
year. A substantial part of the business is from "captive" customers who have
been working with us for many years. Many companies have engaged us from their
inception, and have implemented our custom designed solutions. Many of our
customers rely on us for technical services, products and support, and consider
us to be their own "power supply department" and "ATE systems department".
Beginning in 2004 and more evidently during 2005 we have become a "systems
house" of military systems, making turn-key projects from design to production
on behalf of our customers.

      We also derive a considerable percentage of our business from
word-of-mouth referrals. Our reputation is backed by many years of providing
quality products and services. Our marketing strategy has been based on our
brand name and reputation, which has grown substantially over the last eighteen
years, including eight years prior to the formation of Enertec Electronics, when
business was conducted under the name "Enertec International."

      Over the next 24 months, we plan on continuing our aggressive marketing
efforts. Part of our success within Enertec Systems has been to anticipate the
needs of our clients and to start working on products that we know they will
need thus gaining an edge on our competition in our time to market. Furthermore
by having our ear close to the ground, we have been able to identify those of
our clients and potential clients that look poised to get the big orders and
focus our attention on gaining a foothold within that client. When successful
this strategy enables us to benefit from the large order flow that they receive
both in terms of the typical products they would expect us to produce for them
as well as the more sophisticated products that they might not expect that we
are then in the perfect position to offer to them, especially if they are
inundated with business we are able to step in and ease the burden of some of
the non-core components as well as some of the core components.


                                       5
<PAGE>

      By continuously diversifying into new and more complex products, Enertec
Systems has been able to set itself apart from its competition. In 2005,
following the trend we started in 2004, we decided to increase our suite of
custom products based on our proprietary design and technology. These products
are core components of several long term military programs spearheaded by our
customers, with expected purchase lifecycles over periods of up to 10 years.

      At Enertec Systems the competitive edge lies with the sophistication and
the complex nature of the products. Enertec Electronics however, maintains its
competitive advantage primarily through its range of products, their pricing,
cost effective adaptation to the customers' needs and the strong technical
application support provided to customers.

MARKET CONDITIONS

Enertec Electronics

      The worldwide market for high-tech, telecommunications, and Internet
related products affects the Electronics Division's power supplies sales. In the
second half of 2004 the overall market started to improve, and this trend
continued during 2005 resulting in an increase of sales to this sector.

Enertec Systems

      During the last two quarters of 2004 the local military market improved
significantly resulting in many new orders received which contributed to a large
backlog of military products. This trend continued through 2005 resulting in a
further increase in the backlog totaling $4.5 Million dollars.

      Additionally, manufacturers that sell end products such as missiles,
aircrafts or computers, also provide a support system (e.g., an ATE) to the
end-user. The end-user uses this support system for maintenance of the end
product. Historically, support systems were made by manufacturers selling the
end products. Recently, however, manufacturers have been focusing their
resources on the end products rather than on support systems. This has opened up
a market for us to develop these systems.

      The local Israeli market for ATE's and simulators is estimated at $100 to
$200 million annually. We have about 5% of this market, approximately the same
level of market penetration as our competitors. This market is largely
controlled by big local defense manufacturers. However, there has been a
noticeable trend by these and other defense manufacturers to outsource test
systems to specialized firms so that large manufacturers can focus their
resources on designing their core products.

      The local market for outsourced custom designed military systems is above
$500 million. We have just begun to penetrate parts of this market with products
in the field of avionic systems, ruggedized control systems to name but a few.
We are actively working to increase our product portfolio.

      Our stability is largely due to our diversified client base. We service
clients in the telecommunications, industrial control, medical and the military
core business sectors. In addition to this our sales force pays a significant
amount of attention to our customer relationships, providing more opportunities
to gain our foothold into a contract than our competition does. Furthermore we
offer more customized power supplies, which, we believe, makes it more difficult
for our competitors to bid successfully on the same projects or replace our
product down the road in production or for follow on orders.

      A key element of our growth potential is our ability to enhance our sales
and marketing team. We will need to expand our sales and marketing team
significantly over the next several years to achieve our sales targets. We will
face significant challenges and risks in building and managing our sales and
marketing team, including managing geographically dispersed sales efforts and
adequately training our sales people in the use and benefits of our products.


                                       6
<PAGE>

CUSTOMERS

      Our customers are mostly local Israeli manufacturers of electronic systems
from different segments of the electronics industry, within the military,
industrial, commercial, medical, and telecommunications fields. Due to the high
level of diversification of our customers, we are not dependent on any one
specific market segment; so our overall performance is hardly affected by
fluctuation in the markets. Until 2003 IAI (Israel Aircraft Industries) was our
major customer representing approx 38% of our sales. During 2004 we realized
that several Rafael divisions were receiving an increasingly high number of new
orders as a result of their aggressive marketing around the world but that they
had not increased their technical and manufacturing staff to accommodate this
growth. We positioned ourselves to become their outsourcing team for their new
orders in the areas of design, engineering and production. We increased our
investment in R&D that resulted in new designs and products that enabled us to
successfully bid on a large number of projects. During 2004 we focused our
efforts in diversifying our sales across other technologies, for example avionic
equipment and combat stations. This resulted in increased sales to Rafael
comprising approximately 25% of our total sales in 2004 as compared to 10% in
2003. This investment in R&D has given us an edge with our time to market which
resulted in several strategic alliances with major companies who are bringing
out products utilizing our systems with long project cycles, in many cases up to
10 years. By the end of 2005 Rafael became our major customer representing
approximately 64% of our sales.

      In 2004 Israeli Aircraft Industry (IAI) accounted for approximately only
18% of our sales. During 2005 IAI started to design and manufacture a range of
new products for which we have been asked to provide Test Equipment, Simulators
and Support Systems. We have already received several new orders for the first
units to be delivered during 2006 and are currently working on a large number of
new proposals which we expect will increase our sales to IAI's as a percentage
of our total sales for delivery in 2006.

      The rest of our sales are pretty much evenly spread between our other main
customers: Elbit, El-Op and Tadiran Spectralink, at the military field and a
very large number of customers at the commercial field.

BACKLOG

      As of December 31 2005 we had a backlog of orders for our products and
services in the amount of approximately $4,500,000 as compared to a backlog of
approximately $3,139,000 as of December 31, 2004. The increase of 43% in the
backlog as of December 31 2005 compared to December 31 2004 is mainly due to our
efforts to introduce new products to new customers. During the second half of
2005 our success resulted in a significant increase in orders for military
systems in particular a big increase in orders from several of Rafael's
divisions. Additionally, the delivery lead-time for military systems is six to
twelve months, which gives rise to a significant backlog.

      The orders included in the December 31, 2005 backlog figure are as
follows:

      Enertec Systems
      -------------------------------------------------------------------------
      $2,812,000  representing airborne power supplies, laser systems, flight
                  computers and test systems for avionics and military systems
         335,000  representing test systems for IAI missiles and avionic systems
         215,000  representing airborne power supplies and test systems for
                  infra-red payloads
         116,000  representing various other products
          83,000  representing data link test equipment.
          39,000  representing medical systems
      ----------
      $3,600,000  TOTAL backlog for Enertec Systems
      ==========

      Enertec Electronics
      --------------------------------------------------------------------------
      $900,000   This figure includes a variety of orders for
                 commercial, telecom, medical, industrial and military off-
                 the-shelf power supplies as well as several orders for
                 standard test equipment for both the commercial and military
                 industry.


                                       7
<PAGE>

COMPETITION

ENERTEC ELECTRONICS

      We face intense competition within Enertec Electronics from the existing
manufacturers and distributors of electronic components and products. Presently,
several competing companies that have greater resources than we do, such as
financial, operational, sales, marketing, and research and development
resources, are actively engaged in the manufacture and distribution of
electronic components and products. Our main competitors include Advice
Electronics Ltd., Appletec Ltd., Migvan Technologies Ltd., Boran Technologies
Ltd., Telkoor Power Supplies Ltd., and Horizon Electronics Ltd.

      However, we have been able to compete effectively with these companies for
the following reasons:

      o     Our power supplies are high quality, low cost, and are backed by a
            large number of experienced technicians - unique combination in this
            industry. Most of our sales people are engineers, who have an
            understanding of our customer's requirements, allowing us to provide
            cost-effective solutions.
      o     We have comprehensive experience in test systems, which enables our
            sales people to propose the most cost-effective testing solutions,
            incorporating the highest grade of software and the most
            sophisticated hardware.
      o     We maintain a strong technical team that provides solutions to our
            customers' needs within our target niche.
      o     Our products are sold in diversified activity fields, namely,
            commercial, industrial, military, medical, systems and components.

      Our products have been incorporated into many high volume production
projects with long-term purchasing agreements of up to two years. Since our
customers' products are sold intermittently but in high volume, our customers
place long-term orders with us to cover their production needs over a period of
several months to up to a year to ensure delivery in a timely fashion.
Additionally, we mass-produce power supplies for several clients and are the
main manufacturer to several providers of telecom, datacom, video on demand and
video conferencing. Due to the significant approval process these products must
pass to get to the market, it is not cost effective to replace our component
with a cheaper competitor's product because they would have to resubmit the
product for re-approval with the new component inside.

ENERTEC SYSTEMS

      Our chief source of competition for Enertec Systems is our clients
themselves. Most of our clients have done their own systems testing and core
component manufacturing in house. But as their volume of sales start increasing
it is easier for us to provide an outsourcing capability for them. Furthermore
as we continue to prove our expertise and our clients allow us to create
increasingly complex products for them, we have started to build their trust and
are overtaking a lot of the functions that previously they would have produced
in house. Outside competitors that we face are: Chaban Electronics Ltd,
Symcotech Ltd, and Rada Electronic Industries ltd.

SUPPLIES AND SUPPLIERS

      Our suppliers are diversified and we are not dependent upon a limited
number of suppliers for essential raw materials, energy or other items. The
manufacturers that supply to us are all established companies with facilities
and products in compliance with all relevant international standards. However,
while we are not dependent on any one supplier, disruptions in normal business
arrangements by the loss of one or a few suppliers could cause possible
short-term losses. These disruptions may be experienced if our existing
suppliers are no longer able to meet our requirements. They may also occur if
there is an industry shortage of electronic or mechanical components. Not only
could these disruptions affect our product line and limit our production
capacity, but also, in relation to the shortage of components, could result in
higher costs due to the supply shortage or the need to use higher cost
substitute components.


                                       8
<PAGE>

      The raw materials we use are either electronic components or mechanical
components. The electronic components are purchased from suppliers and the
mechanical components are mainly manufactured by local subcontractors.

EMPLOYEES

      As of December 31, 2005, Enertec Electronics had 11 employees and Enertec
Systems had 50 employees. All technical employees must sign a two-year
confidentiality agreement and a two-year non-compete agreement, which prohibits
our employees, if they cease working for us, from directly competing with us or
working for our competitors. However, Israeli courts have required employers
seeking to enforce non-compete undertakings of a former employee to demonstrate
that the competitive activities of the former employee will harm one of a
limited number of material interests of the employer, such as the secrecy of a
company's confidential commercial information or its intellectual property. We
may not be able to demonstrate that harm would be caused to us, and therefore,
may be unable to prevent our competitors from hiring and benefiting from the
expertise of our former employees. None of our employees are subject to a
collective bargaining agreement. We do not employ any supplemental benefits or
incentive arrangements for our officers or employees. All of our employees are
full-time. Management considers its employee relations to be good.

RESEARCH AND DEVELOPMENT EXPENDITURES

      Research and Development costs totaled approximately $379,000 and $110,000
for the twelve months ended December 31, 2005 and 2004, respectively, which
equates to approximately 5.2% and 1.8% of revenues, respectively, for both
periods. These expenditures have adequately satisfied our research and
development requirements.

      The increase of our R&D expenditures as compared to 2004 is a result of
our strategic move to develop new technologies such as airborne high power laser
targeting systems and other classified technologies which allowed us to form
long term strategic alliances with several big military programs.

SEASONAL ASPECTS OF OUR BUSINESS

      The sales of military products experience seasonal variations this is due
to the fact that the Israeli Ministry of Defense frequently delays the release
of budgets near the end of the fiscal year. Therefore new orders to the military
industry are delayed, leading to delays of orders to the local subcontractors.
When this happens it negatively affects the sales volume of the 1st quarter of
the year. In addition, some of our customers push for increased deliveries
during the last weeks of the year in order to fulfill contractual delivery
obligations to their customers and also to show better business results. This
often causes an upward spike in our fourth quarter sales.

PATENTS AND TRADEMARKS

      We are not dependent on patents or trademark protection with regards to
the operation of our business and do not expect to be at any time in the future.

GOVERNMENT REGULATION

      Every electronic product must comply with the UL standards of the United
States and CE standards of Europe to be eligible for sale in the respective
countries subject to these standards. Every system must be tested, qualified and
labeled under the relevant standards. This is a complicated and expensive
process and once completed, the approved product may not be altered for sale.
The power supply system has the most stringent approval standards.

ITEM 2. DESCRIPTION OF PROPERTY.

      We currently maintain plants in both Haifa and Carmiel. We have no plans
to secure more space, as we believe both locations are suitable for our needs.


                                       9
<PAGE>

      Our Haifa plant is 400 square meters and includes a production hall and
management offices. We lease this property for $16,800 per annum from Mund
Holding Limited, an entity wholly owned by our President and Chief Executive
Officer, Harry Mund. We entered into this lease in January 2001. The Haifa plant
houses the headquarters and accounting offices, the imports department, sales
and administration employees, application engineers, and a service laboratory.
This plant is suitable for our present and near future needs. There is enough
space to accommodate an additional two to four sales engineers, if needed. This
space is also used to sell standard power supplies products.

      Our Carmiel plant is 800 square meters and also includes a production
hall, with a research and development and engineering facility for our Systems
Division. The Carmiel property is leased at $38,400 per annum. We use the
Carmiel plant for manufacturing. It houses engineers, software programmers,
electronic hardware designers, mechanical designers, and electronic and
mechanical assembly personnel. It consists of office rooms for one to three
people, and contains one room for electronics assembly, one for mechanical
assembly, and two for final testing of finished products. The Systems Division
manufactures its customized products in this facility, and accordingly, it is
not a plant for high volume production. It is located in the Carmiel industrial
area, and is in close proximity to many of our Systems Division clients. Every
engineer has individual workstations, which contain computers that are
inter-connected by our own local network for fast communication. The plant has
been updated to satisfy all our present and near future needs. In this facility,
there is space for five additional offices, which would accommodate
approximately 15 more people, and the existing assembly rooms could accommodate
three to eight additional workers.

ITEM 3. LEGAL PROCEEDINGS.

      Except as described below, we are not subject to any pending or threatened
legal proceedings, nor is our property the subject of a pending or threatened
legal proceeding. None of our directors, officers or affiliates is involved in a
proceeding adverse to our business or has a material interest adverse to our
business.

      On April 16, 2002, Orckit Communications brought an action in the Tel Aviv
District Court against Gaia Converter, a French company and Alcyon Production
Systems, also a French company and a subcontractor of Gaia Converter, seeking
$1,627,966, alleging that the DC converters supplied to it by Gaia Converter
were defective and caused Orckit to replace the converters at a substantial
financial expense. Enertec Electronics was joined in the action as a local
Israeli distributor of the Gaia Converter products. Gaia Converter has advised
us that the converters in issue were free from any and all defects and were in
good working order and that it was the faulty performance of Orckit's product
into which the converters were incorporated that caused them to fail at a
greater rate than anticipated by Orckit. Enertec Electronics filed a response to
this claim that there is no cause of action against it, as among other things,
Enertec Electronics is merely the local Israeli sales representative of Gaia
Converter and did not make any implied or express representations or warranties
to Orckit regarding the suitability of the converters or otherwise, nor was
Enertec Electronics required to do so by law. Technical specifications required
by Orckit for the converters were determined and communicated directly by Orckit
to Gaia Converter and all other communications regarding the converters were
directly between Orckit and Gaia Converter. Moreover, Orckit conducted a
qualification test of the converters and confirmed to Gaia Converter that the
converters complied with their requirements subsequent to such testing. Neither
Gaia Converter nor Alcyon Production Systems have filed a response to this
action, and consequently Orkit Communications requested and obtained default
judgments from the Tel Aviv District Court against both Gaia Converter and
Alcyon Production Systems. Enertec Electronics is defending and is continuing to
defend this action vigorously and we do not believe that it will have a material
adverse impact on our business. Orkit has filed affidavits setting out the
evidence supporting their allegations and Enertec has filed affidavits setting
out the evidence supporting its defense. The case has been scheduled for hearing
in June of 2006

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

      No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.


                                       10
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

      Our common stock began quotation on the OTC Bulletin Board on June 1, 2004
under the symbol LPST.OB. For the periods indicated, the following table sets
forth the high and low bid prices per share of common stock. These prices
represent inter-dealer quotations without retail markup, markdown, or commission
and may not necessarily represent actual transactions.

                                              Fiscal 2005        Fiscal 2004
                                            ---------------    ---------------
      Fiscal Quarter                          High      Low    High      Low
      ------------------------------------------------------------------------
      First Quarter Ended March 31          $  1.11    $1.11     N/A       N/A
      Second Quarter Ended June 30          $  1.11    $0.25  $ 1.20   $  0.51
      Third Quarter Ended September 30      $  0.40    $0.40  $ 1.75   $  0.55
      Fourth Quarter Ended December 31      $  1.05    $0.40  $ 2.00   $  1.01

HOLDERS

      As of March 30, 2006, we had 6,483,000 shares of common stock outstanding
and such shares were held by approximately 37 stockholders of record. The
transfer agent of our common stock is Continental Stock Transfer and Trust
Company.

DIVIDENDS

      We have not declared any dividends to date. We have no present intention
of paying any cash dividends on our common stock in the foreseeable future, as
we intend to use earnings, if any, to generate growth. The payment by us of
dividends, if any, in the future, rests within the discretion of our Board of
Directors and will depend, among other things, upon our earnings, our capital
requirements and our financial condition, as well as other relevant factors.
There are no restrictions in our articles of incorporation or bylaws that
restrict us from declaring dividends.

RECENT SALES OF UNREGISTERED SECURITIES

      During the fiscal year ended December 31, 2005 we issued the below
securities without registration under the Securities Act of 1933, as amended
(the "Securities Act").

      On February 22, 2005, we agreed to issue 1,000,000 shares of common stock
to Zvika Avni, a former employee of Enertec Electronics and Chief Operating
Officer of Enertec Systems, as consideration for the transfer of 18% of the
outstanding shares of Enertec Systems Ltd. to Enertec Management Limited.
Completion of the transaction was subject to receipt of a tax exemption (of a
taxable event) by the Israeli Income Tax Authority, which exemption was received
in July 2005. Issuance of the shares of common stock to Zvika Avni was made
pursuant to the exemption from registration requirements under Regulation S
promulgated under the Securities Act. No sales efforts were conducted in the
U.S. in accordance with Rule 903(c), Zvika Avni represented to us that he is not
a U.S. person as defined in Rule 902(k) of Regulation S, Zvika Avni acknowledged
that the shares acquired must come to rest outside the U.S., and the
certificates issued to Zvika Avni contain a legend restricting the sale of such
securities until the Regulation S holding period is satisfied.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

FORWARD-LOOKING STATEMENTS

      The information in this annual report contains forward-looking statements.
All statements other than statements of historical fact made in this report are
forward looking. In particular, the statements herein regarding industry
prospects and future results of operations or financial position are
forward-looking statements. Forward-looking statements reflect management's
current expectations and are inherently uncertain. Our actual results may differ
significantly from management's expectations.


                                       11
<PAGE>

      The following discussion and analysis should be read in conjunction with
the financial statements of Lapis Technologies, Inc. included herewith. This
discussion should not be construed to imply that the results discussed herein
will necessarily continue into the future, or that any conclusion reached herein
will necessarily be indicative of actual operating results in the future. Such
discussion represents only the best present assessment of our management.

LIQUIDITY AND CAPITAL RESOURCES

      As of December 31, 2005, our cash balance was $78,000 as compared to
$124,000 at December 31, 2004. The decrease in cash balance was mainly due to
the increase in the company's revenues. Total current assets at December 31,
2005 were $6,601,000 as compared to $5,739,000 at December 31, 2004. The
increase in current assets is mainly due to the increase in accounts
receivables.

      Our accounts receivable at December 31, 2005 was $3,712,000 as compared to
$2,544,000 at December 31, 2004. This increase is attributable to the increase
in the revenues and to the delivery of a large order in December 2005 in the
amount of approximately $1,250,000.

      As of December 31, 2005 our working capital was $1,087,000 as compared to
$1,249,000 at December 31, 2004. The decrease in the working capital is mainly
due to an increase in bank debt. Bank Leumi and Bank Hapoalim have extended us a
combined total bank debt of $3,316,000 as opposed to $3,027,000 at December
31,2004. This debt is made up of a number of different components: short-term
debt, long-term debt and in the form of lines of credit, which we use from time
to time to satisfy our temporary cash flow needs. Bank Leumi has provided us
with $2,774,000 of total debt based on our pledge of $2,316,000 of our working
capital and customers' receivables due from Israeli Aircraft Industry and
Rafael, and $458,000 by the pledge of some of the financial assets of our
president, Harry Mund. Bank Hapoalim has provided us with $542,000 of total debt
based on our pledging of $373,000 of our customers' receivables due from Tadiran
Spectralink Ltd, Bigband, Zycon and Rad., and $169,000 by the pledging of some
of the financial assets of Mr. Mund. Mr. Mund has personally on deposit with our
banks monies in excess of $1,000,000 which he has pledged as collateral against
our bank debt.

      The current portion of our term loans at December 31, 2005 consisted of
$118,000 compared to $ 163,000 at December 31, 2004. Our total short-term loans
consisted of $1,793,000 of short-term loans and $ 118,000 of current portion of
long-term debt broken down as follows:

                        $827,000 due January 2006,
                        $2,000 due Feb 2006,
                        $110,000 due March 2006,
                        $101,000 due April 2006
                        $852,000 due June 2006
                        $19,000 due Aug 2006.

      At December 31, 2005, our total bank debt was $3,316,000 as opposed to
$3,027,000 at December 31, 2004. These funds were borrowed as follows:
$1,911,000 which includes the current portion of long term debt, as various
short term bank loans due through 2006, $96,000 of long-term debt due through
September 2007 and $1,309,000 borrowed using our bank lines of credit. As a
result, we increased the amount borrowed for the year ended December 31, 2005 by
$289,000 from $ 3,027,000 . The increase in bank debt is mainly due to the
increase in account receivables.

      There are no other lines of credit available to us to refinance our
short-term bank loans. Additionally, we currently do not have any other sources
of financing available to us for refinancing our short-term loans. As of
December 31, 2005 we are current with all of our bank debt and compliant with
all the terms of our bank debt.

      As of December 31, 2004, we had receivables from Harry Mund, our Chief
Executive Officer and President, in the amount of $359,000. The loan to Mr. Mund
was extended as a salary advance. This loan was repaid during 2005. At December
31, 2005, Mr. Mund had receivables from the Company in the amount of $6,620.


                                       12
<PAGE>

FINANCING NEEDS

      Although we currently do not have any material commitments for capital
expenditures, we expect our capital requirements to increase over the next
several years as we continue to develop and test our suite of products, increase
marketing and administration infrastructure, and embark on developing in-house
business capabilities and facilities. Our future liquidity and capital funding
requirements will depend on numerous factors, including, but not limited to, the
levels and costs of our research and development initiatives, the cost of hiring
and training additional sales and marketing personnel to promote our products
and the cost and timing of the expansion of our marketing efforts.

      Based on our current business plan, we anticipate that our existing cash
balances and cash generated from future sales will be sufficient to permit us to
conduct our operations and to carry out our contemplated business plans for the
next twelve months. Currently, the only external sources of liquidity are our
banks, and we may seek additional financing from them or through securities
offerings to expand our operations, using new capital to develop new products,
enhance existing products or respond to competitive pressures. At the present
time, we do not have definitive plans to seek additional financing.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 2005 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2004

      For the fiscal year ended December 31, 2005 we had total revenue of $
7,269,000 compared to revenue of $6,176,000 for the fiscal year ended December
31, 2004. The increase in revenue of $1,093,000, or 17.7 % is due to
- Increased investment in marketing during the first two quarters of 2005
resulting in an increased back-log of $5,350,000 at the end of September 2005,
part of which was delivered during the fourth quarter of 2005:
- Several new products in the military division were introduced during the first
two quarters of 2005 resulted in orders during 2005: and
- Our efforts to increase our sales to several new divisions at Rafael which we
identified as the main client we would target in 2005. As a result we were
invited to bid on numerous projects which we won based on our competitive
pricing and technology.

      Gross profit totaled $2,008,000 for the fiscal year ended December 31,
2005 as compared to $2,156,000 for the fiscal year ended December 31, 2004, a
decrease of $148,000 or 6.9%. Gross profit as a percentage of sales for the
fiscal year ended December 31, 2005 was 27.6% as compared to 34.9% for the
fiscal year ended December 31, 2004. The decrease in gross profit and in the
gross profit as a percentage of sales is due to the fact that:
- We have focused during the last two quarters of 2005 on developing products
with new technologies in diversified fields, resulting in a higher cost of sales
which in turn led to lower profit margins. A new order with a high technology
base requires a substantial initial investment of engineering and financial
resources. Typically we set low profit margins for first orders of new products
to establish our presence and in order to penetrate new customers. Follow up
orders for this kind of project will have higher profit margins than the initial
introductory order.

      One such project of approximating revenues of $1,250,000 was booked and
delivered within 3 months, a record lead time for this kind of project but
involving a high cost, resulting in low profit margin for this first order of a
first kind of technology.

      Total operating expenses are comprised of selling, general and
administrative expenses. Historically R&D costs were included in the cost of
sales. However in the 2005 financials R&D costs were re-classified and shown
separately as a part of the operating expenses.2004 financials have been
re-classified accordingly to allow comparison. Operating expenses for the fiscal
years ended December 31, 2005 and 2004 were $1,770,000 and $1,331,000
respectively, an increase of $439,000 or 33%. The increase in operating expenses
is attributable to the following factors: increased R&D spending of $269,000,
increased G&A expenses of $146,000 due to increased professional services,
including legal and accounting associated with being a a public company in the
amount of $46,000; an increase of approximately $100,000 in a facility lease,
salaries and related costs; and increased marketing and selling expenses of
$24,000 as a result of our efforts to develop the market for our new products.


                                       13
<PAGE>

      We experienced a loss of ($48,000) in the fiscal year ended December 31,
2005 compared to income of $343,000 in the fiscal year ended December 31, 2004.
This decrease in net income in the amount of $391,000 or -114% is mainly due to
the decrease in the gross profit of $148,000 and the increase in R&D expenses of
$269,000.

      As detailed in this annual report, our business is comprised of Enertec
Electronics which derives its revenues from the commercial arena and from
standard military power supplies that it sells to the military industry

      For the fiscal year ended December 31, 2005, Enertec Electronics' revenue,
costs of sales and gross profits were $2,734,000,$2,048,000,and $686,000
respectively, and $2,719,000,$1,992,000 and $727,000 respectively for the fiscal
year ended December 31, 2004. Revenue increased $15,000 or 0.6%. Costs of sales
increased by approximately by $56,000 or 0.3%. Gross profit decreased $ 41,000
or 5,6% due to higher cost of sales.

      For the twelve months ended December 31, 2005, revenues, costs of sales
and gross profits from Enertec Systems 2001 were $4,535,000, $3,213,000 and
$1,322,000 respectively, and $3,457,000,$2,028,000 and $1,429,000 respectively
for twelve months ended December 31, 2004. Revenue increased $1,078,000 or
31.2%, as a result of the successful penetration to new customers with new
products.

      Cost of sales increased approximately $1,185,000 or 58.4% due to increase
in sales,the introduction of products in new technologies niches and penetration
cost to new customers. Gross Profit decreased $107,000 or 7.5% due to higher
cost of sales involved with the penetration to new customers and products in new
technology fields.

      At December 31, 2005, we had two customers that accounted for
approximately 69% of accounts receivable. For the years ended December 31, 2005
and 2004, approximately 57% and 43% of our sales were to two customers
respectively.

OFF-BALANCE SHEET ARRANGEMENTS

      We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.

CRITICAL ACCOUNTING POLICIES

      Concentration of Credit Risk - Concentrations of credit risk with respect
to trade receivables are limited to customers dispersed primarily across Israel.
All trade receivables are concentrated in the manufacturing and distribution of
electronic components segment of the economy; accordingly the Company is exposed
to business and economic risk. Although the Company does not currently foresee a
concentrated credit risk associated with these trade receivables, repayment is
dependent upon the financial stability of this segment of the economy.

      Revenue Recognition and Customer Deposits - Revenue is recorded as product
is shipped, the price has been fixed or determined, collectibility is reasonably
assured and all material specific performance obligations have been completed.
The product sold by the Company is made to the specifications of each customer;
sales returns and allowances are allowed on a case-by-case basis, are not
material to the financial statements and are recorded as an adjustment to sales.
Cash payments received in advance are recorded as customer deposits.

      Revenue relating to service is recognized on the straight-line basis over
the life of the agreement, generally one year. For the years ended December 31,
2004 and 2003 revenue relating to service contracts is less than one percent of
net sales.

      Research and Development Costs - Research and development costs are
charged to general and administrative expense in the accompanying statement of
income and consist of salaries. Research and development cost for the years
ended December 31, 2005 and 2004 were approximately $379,000 and $110,000,
respectively.

      Financial Instruments - The carrying amounts of financial instruments,
including cash and cash equivalents, accounts receivable, bank line of credit,
short term bank loans and accounts payable and accrued expenses approximate fair
value at December 31, 2004 because of the relatively short maturity of the
instruments. The fair value of due from stockholder is not practical to estimate
without incurring excessive cost and is carried at cost at December 31, 2004.
The carrying value of the long-term debt approximate fair value at December 31,
2004 based upon debt terms available for companies under similar terms.


                                       14
<PAGE>

      Foreign Currency Translation - Lapis Technologies, Inc. has one wholly
owned subsidiary, Enertec Electronics Limited, an Israeli corporation, and one
majority owned subsidiary, Enertec Systems 2001 Ltd., an Israeli corporation.
The assets and liabilities of the foreign subsidiaries are translated at current
exchange rates and related revenues and expenses at average exchange rates in
effect during the year. Resulting translation adjustments, if material, are
recorded as a separate component of accumulated other comprehensive income or
loss.

ITEM 7. FINANCIAL STATEMENTS.

      All financial information required by this Item is attached hereto at the
end of this report beginning on page F-1 and is hereby incorporated by
reference.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

      On April 1, 2004, Rogoff & Company, P.C. informed us that they were
resigning as our principal independent auditors because they were no longer
going to do audit work for public companies. Going forward from April 1, 2004
our principal independent auditor will be Gvilli & Co. C.P.A. The decision to
engage Gvilli & Co. was taken upon the unanimous approval of our Board of
Directors.

      During the fiscal years ended December 31, 2003 and December 31, 2002 and
through April 1, 2004, (i) there were no disagreements between the Company and
Rogoff & Company on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of Rogoff & Company would have caused Rogoff & Company to make
reference to the matter in its reports on the Company's financial statements,
and (ii) Rogoff & Company's reports on the Company's financial statements did
not contain an adverse opinion or disclaimer of opinion, or was modified as to
uncertainty, audit scope or accounting principles. During the last two most
recent fiscal years ended December 31, 2003 and December 31, 2002 and through
April 1, 2004, there were no reportable events as the term described in Item
304(a)(1)(iv) of Regulation S-B.

      During the recent fiscal years ended December 31, 2003 and December 31,
2002 and through April 1, 2004, we did not consult with Gvilli & Co. regarding
either:

      1. the application of accounting principles to any specific transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on our financial statements, and neither a written report was provided
to us nor oral advice was provided that Gvilli & Co. concluded was an important
factor considered by us in reaching a decision as to an accounting, auditing or
financial reporting issue; or

      2. any matter that was either subject of disagreement or event, as defined
in Item 304(a)(1)(iv)(A) of Regulation S-B and the related instruction to Item
304 of Regulation S-B, or a reportable event, as that term is explained in Item
304(a)(1)(iv)(A) of Regulation S-B.

ITEM 8A. CONTROLS AND PROCEDURES.

      As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
Act). Based upon this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is: (1) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure; and (2) recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms. There was no change
to our internal controls or in other factors that could affect these controls
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.


                                       15
<PAGE>

ITEM 8B. OTHER INFORMATION.

      None.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.

      The members of our board of directors and our executive officers, together
with their respective ages and certain biographical information are set forth
below. Our directors receive no compensation for their services as board members
but are reimbursed for expenses incurred by them in connection with attending
board meetings. All directors hold office until the next annual meeting of our
stockholders and until their successors have been duly elected and qualified.
Our executive officers are elected by, and serve at the designation and
appointment of, the board of directors. There are no family relationships among
any of our directors or executive officers.

      ----------------- -------- -----------------------------------------------
         Name              Age                          Position
      ----------------- -------- -----------------------------------------------
      Harry Mund           59    Chairman of the Board, Chief Executive Officer,
                                 President and Secretary
      ----------------- -------- -----------------------------------------------
      Miron Markovitz      59    Director, Chief Financial Officer and Principal
                                 Accounting Officer
      ----------------- -------- -----------------------------------------------

      The following is a brief account of the business experience of each of our
directors and executive officers during the past five years or more.

      HARRY MUND, our Chairman of the Board, Chief Executive Officer, President
and Secretary since our inception, and has been the Chief Executive Officer and
President of our subsidiary, Enertec Electronics Limited, since 1987. Mr. Mund
is also the Chief Executive Officer and managing director of Enertec Management
Limited (f/k/a Elcomtech Limited), a wholly owned subsidiary of Enertec
Electronics Limited. From 1983 to 1987, Mr. Mund was the President and Chief
Executive Officer of Enercon International, a marketing and sales firm of
military and commercial power supplies and test equipment. Enercon
International's activities were transferred to Enertec International in 1987,
which subsequently became Enertec Electronics Limited in 1992. From 1975 to
1983, Mr. Mund worked for Elbit Systems as a design engineer of advanced test
systems and as the head of the ATE engineering group. Mr. Mund attended
Ben-Gurion University from 1970 to 1974 and earned a Bachelor of Science as an
Electronic Engineer.

      MIRON MARKOVITZ, a Director, our Chief Financial Officer and Principal
Accounting Officer since our inception, has been the Chief Financial Officer of
our subsidiary, Enertec Electronics Limited, since 1992, responsible for its
accounting and financial management. He attended Haifa University from 1975 to
1978 and earned a BA in economics and accounting.

SIGNIFICANT EMPLOYEES

      The following is a brief description of the business experience of each of
our significant employees:

      ZVI AVNI, age 44, was the System Division Manager for our subsidiary,
Enertec Electronics Limited, from February 1997 to January 2002. His
responsibilities included the design and manufacture of automatic test systems.
Mr. Avni has 18 years of experience with ATE systems for the military market and
worked at Elbit Systems for 12 years as an ATE group leader. Since January 2002,
Mr. Avni has worked for Enertec Systems 2001 Ltd., which is owned by Enertec
Management Limited 73 % and Harry Mund (27%) and continues to be responsible for
the design and manufacture of the Automatic Test Systems and military systems.
Mr. Avni graduated from Haifa Technion Institute of Technology in 1982 and
earned a degree as a Practical Electronic Engineer.


                                       16
<PAGE>

      YAAKOV OLECH, age 54, has been employed by our subsidiary, Enertec
Electronics Limited, since March 1991. Mr. Olech is head of our customer service
electronic lab and technical support, providing after-sales customer support and
repair services for products under warranty or by utilizing service contracts
for repair of power supplies. He attended Radiotechnical Institute, Minsk, USSR
from 1976 to 1979 and has earned a Master in Science in electronic engineering.

      DR. ALEXANDER VELICHKO, age 59, has 28 years of experience as leading
research and development engineer and head of the research and development group
at several companies. From 1981 to 1990, he was a lecturer of electronics and
automation at the Engineering Institute, Karatau, Kazahtan. From 1990 to 1999,
Dr. Velichko was chief engineer of the Laboratory of Electronics and
Automatization Karatau, Kazakhtan, responsible for development of compact
analog/digital measurement devices. Since February 2000 he has been Enertec
Electronics Limited's chief scientist and head of research and development. Dr
Velichko is responsible for the design of custom-made power supplies. He earned
a PhD in Automatic Control at the Moscow Institute of Mining, which he attended
from 1964 to 1969, and earned a Master in Science at Tomsk Institute of
Electronic Engineering.

      Our future success depends, in significant part, on the continued service
of Mr. Mund, and certain other key executive officers, managers, and sales and
technical personnel, who possess extensive expertise in various aspects of the
our business, including Mr. Markovitz, Mr. Avni, Mr. Olech, and Dr. Velichko. We
may not be able to find an appropriate replacement for any of our key personnel.
Any loss or interruption of our key personnel's services could adversely affect
our ability to implement our business plan. It could also result in our failure
to create and maintain relationships with strategic partners that are critical
to our success. We do not presently maintain key-man life insurance policies on
any of our officers.

AUDIT COMMITTEE FINANCIAL EXPERT

      We do not have an audit committee financial expert, as that term is
defined in Item 401 of Regulation S-B. We have not been able to identify a
suitable nominee to serve as an audit committee financial expert.

CODE OF ETHICS

      We have adopted a Code of Ethics and Business Conduct for Officers,
Directors and Employees that applies to all of our officers, directors and
employees. The Code of Ethics is filed as Exhibit 14.1 to our annual report on
Form 10-KSB for the fiscal year ended December 31, 2003, filed with the
Securities and Exchange Commission on June 28, 2004. Upon request, we will
provide to any person without charge a copy of our Code of Ethics. Any such
request should be made to Attn: Harry Mund, C/O Ira Strassberg, Rogoff and
Company, 275 Madison Avenue, NY, NY, 10016. Our telephone number is (212)
937-3580.

SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE

      We do not have affiliated persons required to file reports under Section
16(a) of the Exchange Act.

ITEM 10. EXECUTIVE COMPENSATION.

      The following table sets forth information concerning the annual and
long-term compensation of our Chief Executive Officer, for services as executive
officer for the last three fiscal years. Since we did not compensate any
executive officer during fiscal 2005, the information in the table includes
compensation paid or awarded by Enertec Electronics Limited only. No executive
officer other than Mr. Mund received total annual compensation in excess of
$100,000 during fiscal 2005, 2004 and 2003.

                                       17
<PAGE>

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                            Long-Term
                                                                                           Compensation
                                                                            -------------------------------------------
                                              Annual Compensation                      Awards                Payouts
                                      ------------------------------------- ------------------------------ ------------
                                                                  Other                       Securities                   All
                                                                 Annual     Restricted        Underlying                 Other
        Name and                                                 Compen-    Stock Award(s)    Options/        LTIP       Compen-
   Principal Position       Year       Salary ($)   Bonus ($)  sation ($)   ($)               SARs (#)     Payouts ($)  sation ($)
------------------------- ----------- ------------- ---------- ------------ ----------------- ------------ ------------ -----------
<S>                         <C>         <C>            <C>     <C>                <C>             <C>          <C>         <C>
Harry Mund, Chief           2005        $261,000      -0-      $40,000*          -0-             -0-          -0-         -0-
     Executive Officer      2004        $261,000      -0-         -0-            -0-             -0-          -0-         -0-
     and President          2003        $216,000      -0-         -0-            -0-             -0-          -0-         -0-

</TABLE>

* Represents compensation in lieu of accrued vacation and recreation days
pursuant to Company policies. In Israel it is customary to offer financial
compensation in lieu of vacation and recreation days (days set aside for
employees to enjoy recreational activities)

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth certain information, as of March 31st, 2006
with respect to the beneficial ownership of the outstanding common stock by (i)
each person known by us to be the beneficial owner of more than 5% of our common
stock; (ii) each of our directors; (iii) each of our executive officers; and
(iv) our executive officers and directors as a group. Unless otherwise
indicated, the persons named in the table below have sole voting and investment
power with respect to the number of shares indicated as beneficially owned by
them. The address for each of the below persons is c/o Enertec Electronics
Limited, 27 Rechov Ha'Mapilim, Kiriat Ata, Israel, P.O. Box 497, Kiriat Motzkin
26104, Israel.

<TABLE>
<CAPTION>
                                                   Number of Shares        Percentage
           Name of Beneficial Owner                Beneficially Owned *    Ownership *
           ------------------------------------    --------------------    -----------
<S>                                                        <C>                 <C>
           Harry Mund                                      4,750,000           73.3 %
           Miron Markovitz                                     9,000            0.1 %
           Zvi Avni                                        1,000,000           15.4 %
           ------------------------------------    --------------------    -----------
           All Directors and Executive Officers            4,759,000            73.4%
           as a Group (2 persons)
</TABLE>

* Applicable percentage ownership is based on 6,483,000 shares of common stock
outstanding as of March 31, 2006, together with securities exercisable or
convertible into shares of common stock within 60 days of March 31, 2006 for
each stockholder. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock that are
currently exercisable or exercisable within 60 days of March 31, 2006 are deemed
to be beneficially owned by the person holding such securities for the purpose
of computing the percentage of ownership of such person, but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

      The following table shows information with respect to each equity
compensation plan under which the Company's common stock is authorized for
issuance as of the fiscal year ended December 31, 2005.


                                       18
<PAGE>

<TABLE>
<CAPTION>
                      EQUITY COMPENSATION PLAN INFORMATION
------------------------------------ ------------------------ ----------------------- ---------------------------
Plan category                        Number of securities     Weighted average        Number of securities
                                     to be issued upon        exercise price of       remaining available for
                                     exercise of              outstanding options,    future issuance under
                                     outstanding options,     warrants and rights     equity compensation plans
                                     warrants and rights                              (excluding securities
                                                                                      reflected in column (a)
------------------------------------ ------------------------ ----------------------- ---------------------------
                                               (a)                    (b)                      (c)
------------------------------------ ------------------------ ----------------------- ---------------------------
<S>                                             <C>                     <C>                    <C>
Equity compensation plans approved
by security holders                            -0-                     -0-                     500,000
------------------------------------ ------------------------ ----------------------- ---------------------------

------------------------------------ ------------------------ ----------------------- ---------------------------
Equity compensation plans not
approved by security holders                   -0-                     -0-                       -0-
------------------------------------ ------------------------ ----------------------- ---------------------------

------------------------------------ ------------------------ ----------------------- ---------------------------
Total                                          -0-                     -0-                     500,000
------------------------------------ ------------------------ ----------------------- ---------------------------
</TABLE>

2002 STOCK OPTION PLAN

      We adopted, subject to stockholder approval, our 2002 Stock Option Plan on
October 16, 2002. Our stockholders approved the plan on October 16 2002 The plan
provides for the grant of options intended to qualify as "incentive stock
options", options that are not intended to so qualify or "nonstatutory stock
options" and stock appreciation rights. The total number of shares of common
stock reserved for issuance under the plan is 500,000, subject to adjustment in
the event of a stock split, stock dividend, recapitalization or similar capital
change, plus an indeterminate number of shares of common stock issuable upon the
exercise of "reload options" described below. We have not yet granted any
options or stock appreciation rights under the plan.

      The plan is administered by our board of directors, which will select the
eligible persons to whom options shall be granted, determines the number of
common shares subject to each option, the exercise price therein and the periods
during which options are exercisable, interprets the provisions of the plan and,
subject to certain limitations, may amend the plan. Each option granted under
the plan shall be evidenced by a written agreement between us and the optionee.

      Options may be granted to our employees (including officers) and
directors, any of our subsidiaries, and certain of our consultants and advisors.
Incentive stock options can be issued to all employees (including officers).
Nonstatutory stock options can be issued to employees, non-employee directors,
or consultants and advisors.

      The exercise price for incentive stock options granted under the plan may
not be less than the fair market value of the common stock on the date the
option is granted, except for options granted to 10% stockholders which must
have an exercise price of not less than 110% of the fair market value of the
common stock on the date the option is granted. The exercise price for
nonstatutory stock options is determined by the board of directors, in its sole
discretion, but may not be less than 85% of the fair market value of the
Company's common stock at the date of grant. Incentive stock options granted
under the plan have a maximum term of ten years, except for 10% stockholders who
are subject to a maximum term of five years. The term of nonstatutory stock
options is determined by the Board of Directors. Options granted under the plan
are not transferable, except by will and the laws of descent and distribution.

      The board of directors may grant options with a reload feature. Optionees
granted a reload feature shall receive, contemporaneously with the payment of
the option price in common stock, a right to purchase that number of common
shares equal to the sum of (i) the number of shares of common stock used to
exercise the option, and (ii) with respect to nonstatutory stock options, the
number of shares of common stock used to satisfy any tax withholding requirement
incident to the exercise of such nonstatutory stock option.


                                       19
<PAGE>

      Also, the plan allows the board of directors to award to an optionee for
each share of common stock covered by an option, a related alternate stock
appreciation right, permitting the optionee to be paid the appreciation on the
option in lieu of exercising the option. The amount of payment to which an
optionee shall be entitled upon the exercise of each stock appreciation right
shall be the amount, if any, by which the fair market value of a share of common
stock on the exercise date exceeds the exercise price per share of the option.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      Our management believes the terms of each of the below transactions are at
least as favorable as could be obtained from unrelated third parties.

      During 2001, our subsidiary Enertec Electronics Limited sold a building to
Mund Holding Limited, an entity wholly owned by Harry Mund, our Chief Executive
Officer and President, for approximately $170,320. An independent appraiser and
governmental body, The Capital Gains Authority, determined the sale price. The
building was paid in part with cash in the amount of $93,245, and the balance by
a non-interest bearing loan. There are no written agreements setting forth
repayment terms. The parties have orally agreed that the amount outstanding is
due on demand. As of December 31, 2005, the amount of the loan outstanding was
$48,721.

      Enertec Electronics rents the building's office and manufacturing space
from Mund Holding Limited for $16,800 annually for twenty-four months ending
December 31, 2003. We have exercised our option to lease the building for an
additional twenty-four months ending December 31, 2005 for approximately $18,000
annually.

      On February 22, 2005, we agreed to issue 1,000,000 shares of common stock
to Zvika Avni, a former employee of Enertec Electronics and Chief Operating
Officer of Enertec Systems, as consideration for the transfer of 18% of the
outstanding shares of Enertec Systems Ltd. to Enertec Management Limited.
Completion of the transaction was subject to receipt of a tax exemption (of a
taxable event) by the Israeli Income Tax Authority, which exemption was received
in July 2005. We own 100% of the issued and outstanding capital stock of Enertec
Electronics Limited, which owns 100% of the issued and outstanding capital stock
of Enertec Management Limited. After completion of the above transaction,
Enertec Management owns 73% of the outstanding capital stock of Enertec Systems
Ltd. The remaining 27% of the outstanding capital stock of Enertec Systems Ltd.
is owned by Harry Mund, our Chairman of the Board, Chief Executive Officer,
President and Secretary. Zvika Avni is Chief Operating Officer of Enertec
Systems Ltd.

ITEM 13. EXHIBITS.

Exhibit Number           Description
-------------   ----------------------------------------------------------------

3.1             Certificate of Incorporation of Enertec Electronics, Inc. filed
                January 31, 2002 (Incorporated by reference to our registration
                statement on Form SB-2 (File No. 333-100979), filed with the
                Securities and Exchange Commission on November 4, 2002)
3.2             Certificate of Amendment of Enertec Electronics, Inc. filed
                April 23, 2002 (Incorporated by reference to our registration
                statement on Form SB-2 (File No. 333-100979), filed with the
                Securities and Exchange Commission on November 4, 2002)
3.3             Certificate of Amendment of Opal Technologies, Inc. filed
                October 17, 2002 (Incorporated by reference to our registration
                statement on Form SB-2 (File No. 333-100979), filed with the
                Securities and Exchange Commission on November 4, 2002)
3.4             By-Laws of Lapis Technologies, Inc. (Incorporated by reference
                to our registration statement on Form SB-2 (File No.
                333-100979), filed with the Securities and Exchange Commission
                on November 4, 2002)
10.1            Letter dated February 22, 2005 confirming the terms of share
                purchase (Incorporated by reference to our current report on
                Form 8-K filed with the Securities and Exchange Commission on
                August 23, 2005)
14.1            Code of Ethics (Incorporated by reference to our annual report
                on Form 10-KSB for the fiscal year ended December 31, 2003,
                filed with the Securities and Exchange Commission on June 28,
                2004)
16.1            Letter from Rogoff & Company dated April 1, 2004 (Incorporated
                by reference to our current report on Form 8-K filed with the
                Securities and Exchange Commission on July 6, 2004)
21.1            List of Subsidiaries


                                  20
<PAGE>

31.1            Certification by Chief Executive Officer, required by Rule
                13a-14(a) or Rule 15d-14(a) of the Exchange Act
31.2            Certification by Chief Financial Officer, required by Rule
                13a-14(a) or Rule 15d-14(a) of the Exchange Act
32.1            Certification by Chief Executive Officer, required by Rule
                13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350
                of Chapter 63 of Title 18 of the United States Code
32.2            Certification by Chief Financial Officer, required by Rule
                13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350
                of Chapter 63 of Title 18 of the United States Code

Item 14. Principal Accountant Fees and Services.

AUDIT FEES

      The aggregate fees billed for professional services rendered by our
principal accountants for the audit of our financial statements, for the reviews
of the financial statements included in our annual report on Form 10-KSB, and
for other services normally provided in connection with statutory filings were
$11,500 and $8,250 for the years ended December 31, 2005 and December 31, 2004,
respectively.

AUDIT-RELATED FEES

      We incurred fees of $28,853 and $36,000 for the years ended December 31,
2005 and December 31, 2004, respectively, for professional services rendered by
our principal accountants that are reasonably related to the performance of the
audit or review of our financial statements and not included in "Audit Fees."

TAX FEES

      The aggregate fees billed for professional services rendered by our
principal accountants for tax compliance, tax advice, and tax planning were
$1,500 and $1,500 for the years ended December 31, 2005 and December 31, 2004,
respectively. The services for which such fees were paid consisted of filing our
tax returns for 2005 and 2004.

ALL OTHER FEES

      We did not incur any fees for other professional services rendered by our
principal accountants during the years ended December 31, 2005 and December 31,
2004.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

      Our Board of Directors acts as our audit committee, and consults with
respect to audit policy, choice of auditors, and approval of out of the ordinary
financial transactions.


                                       21
<PAGE>

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                              LAPIS TECHNOLOGIES, INC.


                Date: March 31, 2006      By:  /s/ Harry Mund
                                              ---------------------------------
                                              Harry Mund
                                              Chief Executive Officer


                Date: March 31, 2006      By:  /s/ Harry Mund
                                              ---------------------------------
                                              Miron Markovitz
                                              Chief Financial Officer and
                                              Principal Accounting Officer

         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

   Signature                         Title                            Date
---------------------    ------------------------------------    --------------
 /s/ Harry Mund          Chief Executive Officer and Chairman    March 31, 2006
---------------------             of the Board
Harry Mund

 /s/ Miron Markovitz      Director, Chief Financial Officer      March 31, 2006
--------------------      and Principal Accounting Officer
Miron Markovitz


                                       22
<PAGE>

Gvilli & Co. C.P.A. (isr.)


                          Independent Auditors' Report

To the Stockholders' and the Board of Directors
of Lapis Technologies, Inc.

We have audited the accompanying consolidated balance sheet of Lapis
Technologies, Inc. and Subsidiaries (the "Company") at December 31, 2005, and
the related consolidated statements of income, changes in stockholders' equity
and comprehensive income and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Lapis
Technologies, Inc. and Subsidiaries at December 31, 2004, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.

/s/ Gvilli and Co.
Gvilli & Co.
March 29, 2006
Casarea, Israel


                                      F-1
<PAGE>

                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                      (In Thousands, Except Share Amounts)


                                     ASSETS
                                                                    December 31,
                                                                        2005
                                                                    -----------
Current Assets:
      Cash and cash equivalents                                     $        78
      Accounts receivable                                                 3,712
      Inventories                                                         2,435
      Prepaid expenses and other current assets                             376
      Due from stockholder                                                   --
                                                                    -----------

                         Total Current Assets                             6,601

 Property and equipment, net                                                312
 Deferred income taxes                                                       16
                                                                    -----------

                                                                    $     6,929
                                                                    ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

 Current  Liabilities:
      Bank line of credit                                           $     1,309
      Short term bank loans                                               1,793
      Current portion of term loans                                         118
      Accounts payable and accrued expenses                               2,294
      Income taxes payable                                                   --
                                                                    -----------

                         Total Current Liabilities                        5,514

 Term loans, net of current portion                                          96
 Severance payable                                                           58
                                                                    -----------

                                                                          5,668
                                                                    -----------
      Commitments and contingencies

 Minority interest                                                          356

 Stockholders' Equity:
      Preferred stock; $.001 par value, 5,000,000
          shares authorized, none issued
      - Common stock; $.001 par value, 100,000,000
          shares authorized, 5,483,000
          shares issued and outstanding                                       6
      Additional paid-in capital                                             78
      Accumulated other comprehensive loss                                 (121)
      Retained Earnings                                                     942
                                                                    -----------

                         Total Stockholders' Equity                         905
                                                                    -----------

                                                                    $     6,929
                                                                    ===========

The accompanying notes are an integral part of these financial statements.

                                      F-2
<PAGE>

                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
           (In Thousands, Except Earnings Per Share and Share Amounts)


                                                     Years Ended December 31,
                                                    ---------------------------
                                                        2005           2004
                                                    -----------     -----------
Sales                                                     7,269     $     6,176
Cost of sales                                             5,261           4,020
                                                    -----------     -----------

  Gross profit                                            2,008           2,156
                                                    -----------     -----------

Operating Expenses:
  Research and development expenses                         379             110
  Selling expenses                                           80              56
  General and administrative                              1,311           1,165
                                                    -----------     -----------

    Total operating expenses                              1,770           1,331
                                                    -----------     -----------

  Income from operations                                    238             825
                                                    -----------     -----------

Other Income (Expense):
  Interest expense, net                                    (269)           (238)
  Other income                                               --               8
                                                    -----------     -----------

    Total other income (expense)                           (269)           (230)
                                                    -----------     -----------

  Income before provision for income taxes and
     minority interest                                      (31)            595

  Provision for income taxes                                  3              61
  Minority interest                                         (14)           (191)
                                                    -----------     -----------

Net income                                          $       (48)    $       343
                                                    ===========     ===========

Basic net loss per share                            $     (0.01)    $      0.06
                                                    ===========     ===========

Basic weighted average common shares outstanding      5,902,178       5,483,000
                                                    ===========     ===========

The accompanying notes are an integral part of these financial statements.

                                      F-3
<PAGE>

<TABLE>
<CAPTION>
                     LAPIS TECHNOLOGY, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
                     YEARS ENDED DECEMBER 31, 2005 AND 2004
                      (In Thousands, Except Share Amounts)


                                                                        Accumulated
                                                                            Other                       Total
                                  Common Stock            Additional       Compre-                      Stock-       Compre-
                            -------------------------      Paid-in         hensive       Retained      holders'      hensive
                              Shares         Amount        Capital          Loss         Earnings       Equity       Income
                            ----------     ----------     ----------     ----------     ----------    ----------    ----------
<S>       <C>                <C>                    <C>           <C>           <C>            <C>           <C>           <C>
Balance,
  January 1, 2004            5,483,000              5             78            (63)           647           667           293
                                                                                                                    ==========
                                                    1
Foreign currency
  translation adjustment            --                                          (58)                         (58)          (58)

Net income                          --                                                         295           295           295
                            ----------     ----------     ----------     ----------     ----------    ----------    ----------

Balance,
  December 31, 2004          5,483,000              6             78           (121)           942           904    $      237
                                                                                                                    ==========

Acqusition of additional
  interest in subsidiary     1,000,000              1

Foreign currency
 translation adjustment                                                         (64)                         (64)   $      (64)

Net income (loss)                                                                              (66)          (66)          (66)
                            ----------     ----------     ----------     ----------     ----------    ----------    ----------

Balance, 12-31-05            6,483,000     $        7             78     $     (185)    $      876    $      774    $     (130)
                            ==========     ==========     ==========     ==========     ==========    ==========    ==========

The accompanying notes are an integral part of these financial statements.

                                      F-4
</TABLE>
<PAGE>

                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

                                                               Years Ended
                                                               December 31,
                                                           --------------------
                                                             2005        2004
                                                           -------      -------
Cash flows from operating activities:
  Net income                                               $   (48)     $   343
  Adjustments to reconcile net income to net cash
   used in operating activities:
    Depreciation and amortization                              148          146
    Minority interest                                         (153)         215
    Gain on sale of property and equipment                      --           (8)
    Deferred income tax                                          4
  Change in operating assets and liabilities:
   Accounts receivable                                      (1,168)         539
   Inventories                                                (161)        (616)
   Prepaid expenses and other current assets                    81         (203)
   Accounts payable and accrued expenses                       814         (184)
   Income taxes payable                                       (179)          65
   Customer deposits                                                         --
   Severance payable                                            (1)          --
                                                           -------      -------

Net cash used in operating activities                         (663)         297
                                                           -------      -------

Cash flows from investing activities:
  Proceeds from sale of property and equipment                  --           19
  Purchase of property and equipment                           (46)         (11)
  Decrease in due from stockholder                             355         (139)
  Decrease in due from affiliates                               83          (24)
                                                           -------      -------

Net cash (used in) provided by investing activities            392         (155)
                                                           -------      -------

Cash flows from financing activities:
  Increase (decrease) in bank line of credit, net              607         (254)
  Proceeds from long term debt                               2,926        3,682
  Repayment of long-term debt                               (3,244)      (3,608)
                                                           -------      -------

Net cash provided by financing activities                      289         (180)
                                                           -------      -------

Effects of exchange rates on cash                              (64)         (19)
                                                           -------      -------

Increase (decrease) in cash                                    (46)         (57)
Cash, beginning of period                                      124          181
                                                           -------      -------

Cash, end of period                                        $    78      $   124
                                                           =======      =======
                                                               (46)

The accompanying notes are an integral part of these financial statements.

                                      F-5
<PAGE>

                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)


                                                                 Years Ended
                                                                 December 31,
                                                                --------------
                                                                 2005     2004
                                                                -----     ----
Supplemental disclosure of cash flow information:
  Cash paid during the period for:
      Interest                                                  $ 269     $238
                                                                =====     ====
      Income taxes                                              $  96     $ 40
                                                                =====     ====

Supplemental disclosure of non-cash financing activities:
      Common stock issued for services                          $  --     $ --
                                                                =====     ====

The accompanying notes are an integral part of these financial statements.



                                      F-6
<PAGE>
                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
               (In Thousands, Except Share and Per Share Amounts)

NOTE 1 - DESCRIPTION OF BUSINESS AND ACQUISITION

     Lapis Technologies, Inc. (the "Company") was incorporated in the State of
     Delaware on January 31, 2002. The Company's operations are conducted
     through its wholly owned Israeli Subsidiary, Enertec Electronics Ltd.
     ("Enertec") and its majority owned Israeli subsidiary Enertec Systems 2001
     Ltd. ("Systems"). Enertec is engaged in the manufacturing, distribution and
     marketing of electronic components and products relating to power supplies,
     converters and related power conversion products, automatic test equipment,
     simulators and various military and airborne systems, within the State of
     Israel.

     On January 1, 2002 Enertec assisted in the organization of Systems in
     exchange for 25% of the common stock of Systems. This investment was
     accounted for under the equity method. Systems is engaged in the
     manufacturing of electronic components primarily for military use. On
     December 31, 2002 Enertec increased its common stock ownership interest in
     Systems to 55% for $71, which was included in accounts payable and accrued
     expenses in the accompanying consolidated balance sheet at December 31,
     2002. This amount was paid during January 2003.

NOTE 2 - BASIS OF PRESENTATION

     The accompanying consolidated financial statements present the results of
     operations of the Company for the years ended December 31, 2005 and 2004
     and their wholly owned subsidiary Enertec Electronics Ltd. and their
     ownership interest in Enertec Systems 2001 Ltd. All material intercompany
     accounts and transactions have been eliminated in consolidation.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Concentration of Credit Risk

     Concentrations of credit risk with respect to trade receivables are limited
     to customers dispersed primarily across Israel. All trade receivables are
     concentrated in the manufacturing and distribution of electronic components
     segment of the economy; accordingly the Company is exposed to business and
     economic risk. Although the Company does not currently foresee a
     concentrated credit risk associated with these trade receivables, repayment
     is dependent upon the financial stability of this segment of the economy.



                                      F-7

<PAGE>
                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
               (In Thousands, Except Share and Per Share Amounts)


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

     Cash and Cash Equivalents

     For the purpose of the statement of cash flows the Company considers all
     highly liquid investments with an original maturity of three months or less
     at the time of purchase to be cash equivalents.

     Allowance for Doubtful Accounts

     The Company estimates uncollectibility of accounts receivable by analyzing
     historical bad debts, customer concentrations, customer credit worthiness
     and current economic trends when evaluating the adequacy of the allowance
     for doubtful accounts. At December 31, 2005 the Company has not recorded an
     allowance for doubtful accounts.

     Inventories

     Inventories are stated at the lower of cost (first-in, first-out basis) or
     market.

     Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation and
     amortization. Routine maintenance and repairs and minor replacement costs
     are charged to expense as incurred, while expenditures that extend the life
     of these assets are capitalized. Depreciation and amortization are provided
     for in amounts sufficient to relate the cost of depreciable assets to
     operations over their estimated service lives. The Company uses the same
     depreciation method for both financial reporting and tax purposes. Upon the
     sale or retirement of property and equipment, the cost and related
     accumulated depreciation and amortization will be removed from the accounts
     and the resulting profit or loss will be reflected in the statement of
     income. The estimated lives used to determine depreciation and amortization
     are:

                           Leasehold improvements        10 years
                           Machinery and equipment       10 years
                           Furniture and fixtures        14 years
                           Transportation equipment       7 years
                           Computer equipment             3 years

                                      F-8


<PAGE>
                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
               (In Thousands, Except Share and Per Share Amounts)


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

     Income Taxes

     The Company uses the liability method of accounting for income taxes as
     required by Statement of Financial Accounting Standards ("SFAS") No. 109
     "Accounting for Income Taxes." Under this method, deferred tax assets and
     liabilities are determined based on differences between financial reporting
     and tax basis of assets and liabilities. Deferred tax assets and
     liabilities are measured using enacted tax rates and laws that will be in
     effect when the differences are expected to reverse. Valuation allowances
     are established when it is determined that it is more likely than not that
     the deferred tax assets will not be realized.

     Warranty Reserves

     The Company includes a one-year warranty on all products sold. A provision
     for estimated warranty costs, if material, is recorded at the time of sale.
     Based upon historical experience the Company has not incurred material
     costs relating to its warranty and has therefore not recorded a warranty
     provision at December 31, 2005

     Revenue Recognition and Customer Deposits

     Revenue is recorded as product is shipped, the price has been fixed or
     determined, collectability is reasonably assured and all material specific
     performance obligations have been completed. The product sold by the
     Company is made to the specifications of each customer; sales returns and
     allowances are allowed on a case-by-case basis, are not material to the
     financial statements and are recorded as an adjustment to sales. Cash
     payments received in advance are recorded as customer deposits.

     Revenue relating to service is recognized on the straight-line basis over
     the life of the agreement, generally one year. For the years ended December
     31, 2005 and 2004 revenue relating to service contracts is less than one
     percent of net sales.

     Shipping and Handling Costs

     Shipping and handling costs are included in cost of sales in accordance
     with guidance established by the Emerging Issues Task Force ("EITF") issue
     No. 00-10, "Accounting for Shipping and Handling Costs."



                                      F-9

<PAGE>
                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
               (In Thousands, Except Share and Per Share Amounts)


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

     Stock Based Compensation

     Effective January 1, 2003 the Company adopted the fair method value
     alternative of SFAS No. 148, "Accounting for Stock-Based
     Compensation-Transition and Disclosure." Under the fair value based method,
     compensation cost is measured at the grant date based on the value of the
     award and is recognized over the service period, which is usually the
     vesting period. For stock options, fair value is determined using an
     option-pricing model that takes into account the stock price at the grant
     date, the exercise price, the expected life of the option, the volatility
     of the underlying stock and the expected dividends on it, and the risk-free
     interest rate over the expected life of the option. For the years ended
     December 31, 2005 and 2004 the Company did not issued any stock options.

     Research and Development Costs

     Research and development costs are charged to general and administrative
     expense in the accompanying statement of income and consist of salaries.
     Research and development cost for the years ended December 31, 2005 and
     2004 were approximately $ 379 and $110, respectively.

     Earnings per Share

     The Company presents basic earnings per share and, if appropriate, diluted
     earnings per share in accordance with the provisions of SFAS No. 128
     "Earnings per Share" ("SFAS 128").

     Under SFAS 128 basic net earnings per share is computed by dividing the net
     earnings for the year by the weighted average number of common shares
     outstanding during the year. Diluted net earnings per share is computed by
     dividing the net earnings for the year by the weighted average number of
     common shares and common share equivalents outstanding during the year.
     Common stock equivalents would arise from the granting of stock options.
     For the years ended December 31, 2005 and 2004 the Company did not grant
     any stock options. Diluted earnings per share is not included as it is the
     same as basic for all periods shown.

     Impairment of Long-Lived Assets

     The Company reviews long-lived assets for impairment whenever circumstances
     and situations change such that there is an indication that the carrying
     amounts may not be recovered. In such circumstances, the Company will
     estimate the future cash flows expected to result from the use of the asset
     and its eventual disposition. Future cash flows are the future cash inflows
     expected to be generated by an asset less the future outflows expected to
     be necessary to obtain those inflows. If the sum of the expected future
     cash flows (undiscounted and without interest charges) is less than the
     carrying amount of the asset, the Company will recognize an impairment loss
     to adjust to the fair value of the asset. Management believes that there is
     no impairment of long-lived assets at December 31, 2005.

                                      F-10
<PAGE>
                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
               (In Thousands, Except Share and Per Share Amounts)


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

     Minority Interest

     Minority interest represents the minority stockholders' proportionate share
     of the equity of the Company's subsidiary at December 31, 2005. The
     minority interest is adjusted for the minority's share of the earnings or
     loss of Systems.

     Financial Instruments

     The carrying amounts of financial instruments, including cash and cash
     equivalents, accounts receivable, bank line of credit, short term bank
     loans and accounts payable and accrued expenses approximate fair value at
     December 31, 2005 because of the relatively short maturity of the
     instruments. The fair value of due from stockholder is not practical to
     estimate without incurring excessive cost and is carried at cost at
     December 31, 2005. The carrying value of the long-term debt approximate
     fair value at December 31, 2005 based upon debt terms available for
     companies under similar terms.

     Comprehensive Income (Loss)

     Comprehensive income (loss) consists of net income for the year and foreign
     currency translation adjustments.

     Foreign Currency Translation

     The assets and liabilities of the foreign subsidiaries are translated at
     current exchange rates and related revenues and expenses at average
     exchange rates in effect during the year. Resulting translation
     adjustments, if material, are recorded as a separate component of
     accumulated other comprehensive income or loss.

     Use of Estimates

     In preparing financial statements in conformity with accounting principles
     generally accepted in the United States of America, management is required
     to make estimates and assumptions that affect the reported amounts of
     assets and liabilities and the disclosure of contingent assets and
     liabilities at the date of the financial statements and revenues and
     expenses during the reporting period. Actual results could differ from
     those estimates.

     Reclassification

     Certain reclassifications have been made to the prior year's financial
     statements in order to conform to the current year presentation.

                                      F-11
<PAGE>
                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
               (In Thousands, Except Share and Per Share Amounts)


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

     New Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board ("FASB") issued
     Statement No. 153 "Exchange of Non-monetary Assets - an amendment of APB
     Opinion No. 29". Statement 153 eliminates the exception for nonmonetary
     exchanges of similar productive assets and replaces it with a general
     exception for exchanges of nonmonetary assets that do not have commercial
     substance, defined as transactions that are not expected to result in
     significant changes in the cash flows of the reporting entity. This
     standard, which is effective for exchanges of nonmonetary assets occurring
     in fiscal periods beginning after June 15, 2005, is not applicable to the
     Company's current operations.

     In December 2004, FASB issued Statement No. 123 (revised 2004),
     "Share-Based Payment" (SFAS 123 (revised 2004), effective for public
     entities that file as small business issuers as of the beginning of the
     first interim or annual reporting period that begins after December 15,
     2005. This Statement is a revision of FASB Statement No. 123, "Accounting
     for Stock-Based Compensation," and supersedes APB Opinion No. 25,
     "Accounting for Stock Issued to Employees," and its related implementation
     guidance. SFAS 123 (revised 2004) eliminates the alternative to use Opinion
     No. 25's intrinsic value method of accounting that was provided in
     Statement 123 as originally issued. Under Opinion 25, issuing stock options
     to employees generally resulted in recognition of no compensation cost.
     This Statement requires entities to recognize the cost of employee services
     received in exchange for awards of equity instruments based on the
     grant-date fair value of those awards (with limited exceptions).
     Recognition of that compensation cost helps users of financial statements
     to better understand the economic transactions affecting an entity and to
     make better resource allocation decisions. The Company is required to adopt
     Statement 123 (revised 2004) as of January 1, 2006, and does not expect
     this statement to have a material effect on its results of operations.

     In May 2005, FASB issued SFAS No. 154, "Accounting Changes and Error
     Corrections - a Replacement of APB Opinion No. 20 (Accounting Changes) and
     FASB No. 3 (Reporting Accounting Changes in Interim Financial Statements),"
     that changes requirements for the accounting for and reporting of a change
     in accounting principle. This Statement requires retrospective application
     to prior periods' financial statements of changes in accounting principle
     unless it is impracticable to determine either the period-specific effects
     or the cumulative effect of the change. When it is impracticable to
     determine the period-specific effects of an accounting change on one or
     more individual prior periods presented, this Statement requires that the
     new accounting principle be applied to the balances of assets and
     liabilities as of the beginning of the earliest period for which
     retrospective application is practicable and that a corresponding
     adjustment be made to the opening balance of retained earnings (or other
     appropriate components of equity or net assets in the statement of
     financial position) for that period rather than being reported in an income
     statement. When it is impracticable to determine the cumulative effect of
     applying a change in accounting principle to all prior periods, this
     Statement requires that the new accounting principle be applied as if it
     were adopted prospectively from the earliest date practicable.

     Statement 154 is effective for accounting changes and error corrections
     made in fiscal years beginning after December 15, 2005 (calendar year
     2006). Early adoption is permitted.

                                      F-12

<PAGE>
                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
               (In Thousands, Except Share and Per Share Amounts)


NOTE 4 - INVENTORIES

     Inventories consist of the following at December 31, 2005:

              Raw materials              $         414
              Work in process                    1,625
              Finished goods                       396
                                         -------------

                                         $       2,435

NOTE 5 - PROPERTY AND EQUIPMENT

     Property and equipment consists of the following at December 31, 2005:

              Leasehold improvements     $          90
              Machinery and equipment                5
              Furniture and fixtures               163
              Transportation equipment             251
              Computer equipment                   324
                                         -------------

                                                  833
              Less accumulated depreciation
              and amortization                    (521)
                                         -------------
                                         $         312

NOTE 6 - INCOME TAXES

     The provision for income taxes consists of the following for the years
     ended December 31:


                                            2005           2004
                  Current:
                       Foreign            $       7       $      60
                  Deferred:
                       Foreign                   (4)              1
                                          $       3       $      61
                                          -------------------------



                                      F-13

<PAGE>
                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
               (In Thousands, Except Share and Per Share Amounts)


NOTE 6 - INCOME TAXES - (continued)

     At December 31, 2005, the Company has a net operating loss carryforward of
     approximately $200, which may be utilized to offset future taxable income
     for United States Federal tax purposes. This net operating loss
     carryforward begins to expire in 2022. The only timing difference which
     creates a deferred tax asset is the net operating loss carryforward. This
     net operating loss carryforward creates a deferred tax asset of
     approximately $10. Since it is more likely than not that the Company will
     not realize a benefit from these net operating loss carryforwards a 100%
     valuation allowance has been recorded to reduce the deferred tax asset to
     its net realizable value.

     Deferred tax assets are classified as current or non-current, according to
     the classification of the related asset or liability for financial
     reporting. At December 31, 2004 the Company's wholly owned Israeli
     subsidiary has a deferred tax asset of approximately $20, due to timing
     differences relating to severance payable. The Israeli subsidiary has not
     recorded a valuation allowance as it is more likely than not that the
     timing differences will be utilized.

     The following is a summary of the components of non-current deferred tax
      assets at December 31, 2005:

              Severance  payable                   $       16
              Net operating loss carryforward             200
              Valuation allowance                        (200)
                                                   ----------

              Deferred tax assets                  $       16
                                                   ==========


     Differences between the United States Federal statutory income tax rate and
     the effective tax rate are as follows for the years ended December 31:


                                   2005                  2004
     ----------------------------------------------------------
     Federal statutory rate        34.0%                 34.0%
     Valuation Allowance          (34.0)                (34.0)
     Effect of foreign taxes        0.0                  10.3
                                 ------------------------------
                                    0.0                  10.3%





                                      F-14

<PAGE>

                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
               (In Thousands, Except Share and Per Share Amounts)


NOTE 7 - LONG-TERM DEBT

     Long-term debt consists of the following at December 31, 2005:

              Bank line of credit due December 31, 2005
                at 6.7% per annum                           $      1,309
              Short-term bank loans, payable within
                twelve months at rates ranging from
                7% per annum and 9.5% per annum                    1,793
              Term loans, due between February 2005 and
                September 2007 at rates ranging from 7.0%
                per annum and 8.5% per annum                         215
                                                            ------------

                                                                   3,317
     Less current portion of term loans                            3,221
                                                            ------------

                                                            $         96
                                                            ============

     The Company has pledged its accounts receivables as collateral against its
     long term debt, which is payable to one financial institution. In addition,
     the president has guaranteed personal assets, as defined in the agreement,
     against the Company's long term debt.

     The aggregate maturities of long-term debt are as follows at December 31,
     2005:

                    Year Ended
                       2006                                 $      1,911
                       2007                                           89
                       2008                                            5
                                                            ------------
                       2009                                            3
                                                            ------------
                                                            $      2,008




                                      F-15


<PAGE>
                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
               (In Thousands, Except Share and Per Share Amounts)


NOTE 8 - SEVERANCE PAYABLE

     Severance payable represents amounts computed on employees' most recent
     salary and the number of years working in Israel. The Company's liability
     is partially offset by amounts deposited to insurance policies, which are
     under the company's control.

NOTE 9 - STOCK OPTION PLAN

     On October 16, 2002 the Board of Directors of the Company authorized the
     formation of the 2002 Stock Option Plan (the "Plan"), subject to
     stockholder approval. The Plan provides for the granting of incentive stock
     options, non-statutory stock options and stock appreciation rights. The
     incentive stock options can be granted to employees, including officers, or
     any subsidiary of the Company. The non-statutory stock options can be
     granted to all employees, including officers, non-employee directors,
     consultants or any subsidiary of the Company. Non-statutory stock options
     can only be granted to consultants that have rendered a bona fide service
     to the Company, so long as the service is not in connection with the offer
     or sale of securities in a capital raising transaction. The number of
     shares of common stock reserved for issuance under the Plan is 500,000,
     subject to adjustment in the event of a stock split, stock dividend,
     recapitalization or similar change in the Company's capital structure.

     Incentive stock options must be granted prior to ten years from the date
     the Plan was initially adopted by the Board of Directors. The option price
     for shares issued as incentive stock options shall not be less than the
     fair market value of the Company's common stock at the date of grant unless
     the option is granted to an individual who, at the date of the grant, owns
     more than 10% of the total combined voting power of all classes of the
     Company's stock (the "Principal Stockholder"). Then the option price shall
     be at least 110% of the fair market value at the date the option is
     granted. No incentive stock option granted under the Plan shall be
     exercisable after ten years from its grant date. If the incentive stock
     option is granted to a Principal Stockholder then the exercise period is
     five years from the date of grant. Every incentive stock option granted
     under the Plan shall be subject to earlier termination as expressly
     provided for in the Plan.

     The option price for shares issued under the non-statutory stock options
     shall be determined at the sole discretion of the Board of Directors, but
     may not be less than 85% of the fair market value of the Company's common
     stock at the date of grant. A non-statutory stock option granted under the
     Plan may be of such duration as shall be determined by the Board of
     Directors.

NOTE 10 - RELATED PARTIES

     Due to Stockholder

     At December 31, 2005 the majority stockholder had advances due to the
     Company of $6 that accrue interest at 4% per annum. These advances are
     repayable within the next twelve months.

                                      F-16

<PAGE>
                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
               (In Thousands, Except Share and Per Share Amounts)


NOTE 11 - RELATED PARTIES - continued

     Due from Affiliate

     During 2001 the Company entered into a sale-leaseback transaction with an
     entity owned by the majority stockholder of the Company. The Company sold a
     building for approximately $170 and received approximately $113 in cash and
     a note receivable for $57, which was paid in full during the year ended
     December 31, 2003. No gain or loss was recorded on this transaction, as the
     book value of the building equaled the fair market value. The Company has
     agreed to exercise its option to rent this property through December 31,
     2007 at approximately $18 annually with an option to renew the lease for an
     additional two years ending December 31, 2009 This lease has been
     classified as an operating lease.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

     Lease commitments

     The Company leases certain office and manufacturing space under two
     noncancellable operating leases expiring at December 31, 2007 and March 31,
     2007. Rent expense, including municipal taxes and utilities associated with
     the leases approximated $59 and $59, respectively, for the years ended
     December 31, 2005 and 2004.

     At December 31, 2005, total minimum rentals under noncancellable operating
     leases with an initial or remaining term lease term of one year or more are
     as follows:

                Year Ending
                December 31:
                ------------

                    2006          $          59
                    2007                     59
                                  -------------
                                  $         118

     Legal proceedings

     A Customer has brought an action in the Tel Aviv District Court for an
     unspecified monetary amount against one of the Company's suppliers, a
     subcontractor of the supplier and Enertec, alleging that the materials
     supplied were defective and caused the Customer to replace the materials at
     a substantial financial expense. Enertec filed a defense claim that there
     is no cause of action against them as Enertec is only the local Israeli
     sales representative and did not make any implied or express representation
     or warranty to the Customer regarding the suitability of its materials.
     Management believes that the chance of losing this suit is remote, intends
     to defend this action vigorously and does not believe that it will have a
     materially adverse impact on the Company's operations and liquidity.

                                      F-17

<PAGE>
                    LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
               (In Thousands, Except Share and Per Share Amounts)


NOTE 12 - CONCENTRATIONS

     The Company had deposits with commercial financial institutions, which, at
     times, may exceed the FDIC insured limits of $100 in the United States.
     Management has placed these funds in high quality institutions in order to
     minimize the risk. Cash held in Israel at December 31, 2004 was $78.

     At December 31, 2005 the Company had two customers that accounted for
     approximately 69% of accounts receivable. For the years ended December 31,
     2005 and 2004 approximately 57% and 43%, respectively, of the Company's
     sales were to two customers, respectively.

NOTE 13- SEGMENT AND GEOGRAPHIC INFORMATION

     Information about the Company's assets in different geographic locations at
     December 31, 2005 is shown below pursuant to the provisions of SFAS 131,
     "Disclosures About Segments of an Enterprise and Related Information."

                  Total assets:
                    Israel            $     6,929
                    United States               0
                                      -----------

                                      $     6,929
                                      ===========











                                      F-18